Q: I'm a 61-year-old single woman who is trying to work out how to have some cash when I retire. I have no savings as I brought up my son alone (only KiwiSaver with $42,000), a house worth probably over $600,000, with a $70,000 mortgage due to it being a leaky home.
A: My cousin has suggested we buy an investment property and I wonder what your thoughts are on this. I would want my money out in probably about eight years so I can enjoy any profits before I pop my clogs. Is it worth doing?
That depends on several things, including your appetite for risk.
Let's look first at getting a mortgage. "There needs to be some separating," says mortgage adviser Karen Mooney of Lifetime Mortgage Solutions. "Your reader doesn't want to introduce her own property into this." That means you and your cousin should use the rental, not your house, as security for the mortgage.
Mooney also highly recommends that you each put in an equal amount. "If the cousin is not putting risk into it, it's not a good idea."
The two of you might, for example, each deposit $50,000, and together borrow $400,000 to buy a $500,000 property.
You could probably borrow your deposit against your house, and should specify that you're raising the money for the purpose of investing, so the mortgage interest is tax-deductible.
But the lender will also look into your and your cousin's income and ability to meet mortgage payments. Would you cope if you receive no rent for a period, or if interest rates rise a lot, or if the property needs major maintenance? I was going to add "if you find the property leaks", but I'm sure you would make certain that won't happen again!
"I might put in a $5000 to $10,000 line of credit, in case there are any issues," says Mooney.
Don't forget, too, that the mortgage on your home will have increased. If you want to pay it off by the time you retire - which is highly desirable - you'll have to increase those payments.
Mooney also points out that if you raise a mortgage with your cousin, you are each legally liable for the whole mortgage. "People think they're taking on 50 per cent of the debt, but they're taking on 100 per cent. It's very important for you both to be transparent about your capabilities."
Okay, let's assume you two can get a mortgage and can cope with any shortfalls between the rental income and outgoings.
To make this all work over eight years or so, you need to sell the property at a gain, over and above any money you've had to contribute, and after paying commission and other selling costs.
Your cousin will probably point to recent house price rises and predict they'll continue. And if you were planning to hold the property for 15 or 20 years, I would agree. But over eight years?
If prices stagnate or fall, you could end up stuck with the investment well into retirement, hoping the tide will turn, or selling at a loss. And in your late 60s it won't be nearly as easy to recover as for a younger person.
Sorry to be so negative. But the plan is pretty risky.
There's another issue here, too. Many people advise against doing business with family and friends. If you fall out, you lose way more than the business.
So what could you do instead? I suggest you concentrate on paying off your mortgage before retirement. Your KiwiSaver balance will be somewhat bigger by retirement and you may be able to free up some money by moving to a smaller house or a cheaper area.
That's not nearly as exciting as making many thousands on a rental - which is a possibility. But finding yourself worse off than you are now, and dealing with family hostility, is also a possibility. Your choice.
Interest for maths fans
Q: I was interested to read the Q&A two weeks ago comparing 4.3 per cent interest paid monthly with 4.4 per cent interest paid at the end of the year, on $100,000.
Although the differences in the example may be small in absolute terms, it rather shows the dangers of subtle differences and exactly what all these various calculators are doing. Quoted interest rates are not always directly comparable.
To get to the result of $4385.77 with the bank's quoted rate of 4.3 per cent, as far as I can see you would need to assume:
The bank gives you interest (of 0.043/12 x 100,000 = $358.33) at the end of each month.
You can then reinvest those amounts - somewhere - and earn further interest (358.33 x .043 x 11/12 on the amount you get at the end of month one; 358.33 x 0.043 x 10/12 at the end of month two; and so on). If you add it all up, depending on how you do the rounding, that gives you additional interest of $84.75. So at the end of the year you will have a total of $104,384.75.
This is of course what you need to compare to the $104,400 you would end up with on the annual rate of 4.4 per cent.
So you might conclude that the 4.3 per cent offer and the 4 per cent offer are very similar.
But in the 4.3 per cent monthly example you have to think about the "re-investment risk". You need to actually find someone to give you 4.3 per cent in future on those monthly amounts you receive. So the gap between the two could be a lot more than at first sight.
I have the genetic defect of liking maths, and I spend my working life doing this sort of thing. And I admit I could still have this all wrong. What chance does the man on the proverbial Clapham Omnibus have to understand it all, even if someone does show him the sums?
I must say I do find it disappointing, to say the least, that the bank itself couldn't even try to explain it to your inquirer.
A: Me too. I'm also disappointed that you call your affection for maths a genetic defect - even if it's said in fun. Often we hear people almost skiting that they failed School Cert maths. I bet they wouldn't be so proud of failing English. Why is such a wonderful subject so uncool?
Anyway, on to your assumptions. I expect that whenever a bank pays monthly interest it would pay at the end of each month. And if you tied up the money for a year - which was the case here - it's standard for a bank to reinvest your monthly interest at a pre-agreed rate.
Still, you're right that interest can be compounded in more than one way, and the bloke on the bus could well find it confusing.
Our original correspondent asked not just one but three banks which was the better deal, and got no good answer. I wonder if a clearer question would be: "If I invest $x in this, how much will I get back at the end?" At maturity, the bank must calculate the amount to pay out. Surely they could do that calculation at the start.
I would love to hear from a bank that will promise to reply to everyone who asks that question before investing. Come on, banks - here's your chance for some free publicity!
Tax on brokerage costs
Q: Just an aside to the query from someone in a recent column about whether or not KiwiSaver management fees were tax-deductible.
I have some Smartshares that I have been buying for the past 10 years or so.
Due to the buoyant market in the past 12 months, I have been liquidating some of my Smartshares and buying other individual shares through the Government and other offers, as they have become available. My intention was always to build a diverse portfolio, producing an income stream through dividends.
To what extent are the brokerage costs tax-deductible? Is it only the fees for purchases, or can I also include the cost of selling stock, especially given that at this stage I am only selling to reinvest in something else? Any help appreciated on this.
A: The brokerage costs probably aren't deductible. But that's actually good news for you.
Those costs would be deductible only if you were in the business of trading shares. And if that were the case, the capital gains when you sell shares would be taxable.
It boils down to your purpose for buying and selling shares, says Inland Revenue.
"Generally, the buying and selling of shares to maintain a share investment portfolio would be likely viewed as capital expenditure," says a spokesman.
"If a person does not appear to be in a business of buying and selling shares, the related brokerage fees would be viewed as costs incurred to preserve the value of their share investment portfolio, therefore cannot be claimed for tax purposes.
"Inland Revenue advises customers to discuss their circumstances with their tax adviser to identify the likely tax obligations specific to their situation," he adds.
Great retirement investment
Q: My husband, then 64, and I, five years younger, signed up for KiwiSaver as soon as it started in 2007.
Six-and-a-half years later, after mostly paying in the minimum amount each year of $1043 to get the maximum tax credit, it is now worth around $36,000 and we can now both withdraw from it.
We contributed about $12,380, our boss $970, the Government $12,390 and investment returns in the growth fund we chose, $10,780. Fees totalled about $300 and tax $70. Our work contribution was from seasonal part-time work on the minimum wage over the six years.
Even though the Government has chopped the tax credit maximum from $1043 a year to $521, it is still a great investment to be in.
We thank the Government/people of New Zealand for giving us this money to buy a half share in a small campervan with friends. We do not need the money to cover our future living expenses.
We joined up our first grandson as soon as he was born. Sadly the second one is a "foreigner" and not eligible.
A: The way the numbers work - as has been explained in this column before - KiwiSaver is a really good deal for those nearing retirement.
And you've been particularly lucky because you've invested in a growth fund over a period in which growth has been good. That was a risky strategy over just seven years - which I wouldn't recommend - but for you it paid off. Happy camping!
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office.
Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.